Monday, 23 April 2007

Money for nothing - mortgage equity withdrawal

It is an old cliche, but nevertheless it is true. UK homeowners have used their houses as ATMs. In the last quarter of last year, UK homeowners managed to extract almost 7 percent of post-tax income from their homes in the form of mortgage equity. They borrowed on the rising value of their homes, and took that cash straight down to the high street and spent it on consumer goods, new cars, and holidays.

Think about that number for a moment. For every one hundred pounds of income after tax, another seven pounds was borrowed on the basis of home values. What is more, the UK consumer has been at this lark since 2000.

However, it is not the first time, that the UK consumer has played that trick. Look back a few years. In 1989, mortgage equity withdrawal peaked at almost 8 percent of post-tax income. Then, like now, the housing market was on fire. Then, like now, all that extra consumption fed straight into higher prices. Then, like now, the Bank of England realised too late that they needed to raise interest rates. And when interest rates increased, housing prices collapsed, mortgage equity withdrawal disappeared, consumption contracted and we had a recession.

Do we ever learn anything from the past? Clearly, the Bank of England hasn't learnt much.